Global steel 2013
A new world, a new strategy
Economic scenario around the world continues to be challenging but hopefully seems to be bottoming out. Amid this macro environment, challenges for the steel industry remain.
“Controlling raw material costs is a benefit of vertical integration; however, steelmakers should critically assess the value of vertical integration and consider possible alternatives to help mitigate the cost of raw materials.” - Mike Elliott, Global Mining & Metals Leader, Ernst & Young
This report offers an insight into the steel scenario in India and globally and also provides recommendations for accelerating growth.
Restoring sustainable value: need of the hour for the global steel industry
The big challenge for steelmakers in 2013 is how to be cost competitive while maintaining enterprise value. To achieve this, producers need to assess and address whether they are best set up for the new operating environment:
- Is there value in vertical integration?
In recent years, many steelmakers have integrated raw material (coal, iron ore) mines into their supply chains. However, our new analysis suggests that despite the benefits in controlling raw material costs, it may not always have a positive benefit on enterprise value.
Steelmakers should critically assess the value of vertical integration to their business. They should also consider alternatives to managing raw material costs and supply, such as long-term contracts with suppliers and relocating production sites closer to upstream suppliers.
- Strategic cost reduction for survival and future growth
With continuing weak market conditions, cost reduction activities are essential for steelmakers’ sustainability and future growth.
While these activities are necessary, it is crucial that steelmakers do not move away from their overall company strategy, thus potentially causing further value erosion.
The different approaches that are currently being used to reduce cash operating costs include:
- Reducing production volumes from loss making plants to stabilize steel prices and address oversupply in the market
- Restructuring labor
- Canceling or reducing supply contracts
- The optimal capital structure for the future business model
Today’s economic environment is forcing steelmakers to assess whether their capital structure is optimized for the new operating environment. The goal for companies is the optimal allocation of capital to maximize shareholder returns and achieve the most efficient capital structure.
As a result, an increasing number of corporate boards are putting greater focus on the key drivers of efficient capital allocation.
This focus is extremely relevant to steelmakers because falling demand and oversupply in regional markets have led to short-term liquidity challenges that may threaten credit ratings and debt covenants.
Competing for growth framework